Roth IRA Military Secret

Roth IRA Military Secret

By |2018-09-06T10:34:48+00:00September 6th, 2018|Financial Planning|

Buried in the dusty archives of the IRS code is a military secret. The benefit for some military families can be substantial – the ability to deposit up to $500,000 into a Roth IRA, all at one time.

In 2008 the Federal Government passed the Heart Act (Heroes Earnings Assistance and Relief Tax Act). It allows surviving spouses of military personnel who receive a death gratuity or SGLI payment to put up to $500,000 into a Roth IRA bypassing contribution limits and the phase-out due to income. While the Heart Act provides for a much larger contribution, withdrawals are still subject to the provisions of a standard Roth IRA.

The death gratuity program provides a tax free payment of $100,000 to eligible survivors of military members who die while on active duty or while serving in certain reserve statuses.

SGLI (Servicemembers Group Life Insurance) provides low-cost term life insurance to eligible service members. An eligible member is automatically issued the maximum $400,000 coverage limit.

The Heart Act also permits surviving spouses to deposit death gratuity and SGLI payments into Coverdell Education Savings Accounts (ESA). Distributions from ESAs are generally tax-free as long as the funds are used for the beneficiary’s qualified education expenses. Unqualified education expenses are subject to penalties and taxation similar to those for qualified retirement plans.

To be eligible for the tax-free deposit, the amount treated as a qualified rollover contribution to a Roth IRA and/or Coverdell ESA must be made within one year from the date the beneficiary receives the money. Contributions can be made to a Roth IRA and an ESA but the combined contribution cannot exceed the combined amount of military death gratuity and SGLI payments.